The good thing about Federal Reserve monetary policy is that it is far less complex than ECB policy. Anyone remember last week’s ECB preview? The second axiom we want to posit is that the Fed will not be able to get inflation down without causing a recession or cause a big problem *elsewhere*.

Tonight, consensus expects a 25bps raise in both the target federal funds rate and the policy rates. However, as we explained on February 24, there are many different ways the Fed can raise rates tonight. In a nutshell, the policy rates are the rates that matter, namely the interest on excess bank reserves (or IOR rate, currently at 15bps) and the overnight reverse repo rate for wholesale cash (ON RRP rate), currently at 5bps. We valiantly/foolishly think that the Fed will raise the two policy rates by 35bps each so that at least the highest of the two – IOR rate – will match the upper range of the target federal funds rate (which will be raised to 50bps, with the lower end at 25bps). Call it a compromise between the large group of hawks who have been very vocal in calling for a 50bps hike tonight and the rest of the FOMC, which includes Chair Powell himself, who do not want to rock the boat now.


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